Wednesday, 11 January 2012

The Kenyan Shilling Loses Slightly Against the Dollar

After recording impressive gains to the 83 level (during the third week of December last year), the Kenyan Shilling has lost ground slightly against the dollar and it is now trading at the 87 level (at the time of writing this article).

The slight side of the local unit is largely attributed to the rising demand for the United States dollar. The high demand for the greenback has been caused by increased importation of raw materials by companies who have just come back to the market after the holiday season. Specifically, the increased demand from the corporate and oil sectors have weighed down the Kenyan Shilling to its current trade level.

As mentioned in earlier articles, the Central Bank of Kenya had been trying to tame the volatility of the Shilling through enactment of some stringent policies. These initiatives bore fruit and the Shilling strengthened considerably against the dollar. However, these initiatives were only short-term and punitive to the economy of the country. As a result, in recent days, the local currency has been ceding more ground. The supply of the dollar has not been equivalent to its demand in the market; therefore, this has led to the slight fall of the local unit.

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Will the weakening of the Kenyan Shilling continue? In the current market conditions (the high demand for the dollar), the Shilling is expected to cede more ground to the dollar. Thus, investors will be looking closely at the 90 trade level in the coming weeks.

Will it reach that level? Well, let’s wait and see…..

Wednesday, 21 December 2011

The Kenyan Shilling Strengthens Further

The Kenyan Shilling has continued to record impressive gains from the historic low of 107 it experienced in mid-October. The local currency is still rallying hard against the dollar (at the time of writing this article), and it is trading at the 83 level. This level was last seen eight months ago – in March this year.

The further strengthening of the Shilling is attributed to a myriad of factors, which do not work in segregation. It is of essence to note that the appreciation of the local unit is due to an intricate interplay of various macroeconomic factors, which have worked out in favour of the Shilling.

Most importantly, the decision by the Central Bank of Kenya to mop up excess liquidity in the market through repurchase agreement gave the Shilling a shot in the arm. The regulator made a controversial decision to increase the Central Bank Rates (CBR) and the Cash Reserve Ration (CRR). This move saw close to Ksh. 7 billion mopped out of the market some days ago. Consequently, this led to a further liquidity squeeze and made the Shilling to find its footing after months of free fall.

Besides the existing monetary stance, the Kenyan Shilling has also greatly benefited from low demand for dollars. Most investors holding onto their dollar positions have started relinquishing them in fear of further strengthening of the local unit. This panic move is attributed to the current tight liquidity as it is becoming unattractive to hold on the greenback.

In addition, the strengthening of the Kenyan Shilling is attributed to the increased inflows from tourism, horticulture, and remittances by the Diaspora. Since the Kenyan government embarked on major initiatives to boost tourism in the country, including fighting terrorists, the sector has recorded impressive growths. The horticultural industry has benefited from short rains that have been experienced in the country since October. And, maybe because it is the holiday season, the Diaspora have pumped in more cash to their families and friends in the country. Thus, the local unit has absorbed these glad tidings to make it become the world’s best performing currency.

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Will the impressive gains of the local currency continue? In the current monetary conditions, the upsurge of the Kenyan Shilling against the dollar is expected to continue. Since the Shilling got back on its feet (gaining about 22% of its value from the 107 level), forex dealers have made efforts to trim their dollar positions. In the coming weeks, traders will be watching for the 80 level. On the flipside, the local currency may have found a resistance at the 83 level and it may stay there for some time.

Friday, 2 December 2011

The Kenyan Shiling: Signs of hope?

Concerted efforts by policy makers to a more aggressive monetary stance to fight inflation and currency volatility has made the Kenyan shilling become the best performing currency in the world recently. Is this a sign of hope that the local currency, which hit a low of Ksh.107 to the dollar in mid-October, is strengthening further?

Currently trading at Ksh. 90 to the dollar (as per the time of writing this article), the home currency has since considerably gained approximately 15% composure from its historic 17-year low in mid-October.

This wonderful gain within a short time is largely attributed to the decision by the Central Bank of Kenya (CBK), through its monetary policy committee, to increase its indicative lending rate to banks to 16.5% in early November. Therefore, as traders continue to offload their dollar positions in the market, the demand for the shilling is rising, and this is leading to its impressive appreciation. This relative scarcity of the shilling is playing an essential role of meeting CBK’s objective of mopping up liquidity in the market.

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Will the gains of the local currency continue? In the current monetary conditions (the sky-high interest rates), the shilling is expected to strengthen further. At the moment, most banks have set their lending rates to just above 31%, and this will lead to further scarcity of the home currency. Analysts have pointed out that the 90 level is currently a psychological area of resistance. Thus, any slump to below that level could make the shilling touch the 85 level soon. On the other hand, if it falls below that level, it can retreat back to the 95 level.

So, which way will you go Mrs. Shilling? Let’s wait and see….

Friday, 7 October 2011

Woes of the shilling

From early this year, the Kenyan shilling has considerably lost its value against the other major currencies of the world. Notably, it has lost 23% of its value to the dollar, and it is currently trading above the 100 mark at the Nairobi Stock Exchange (NSE). This is the lowest point the local currency has reached in 17 years. Sadly, experts are saying that the currency can slide further if adequate intervention policies are not implemented.

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There are many reasons why the Kenyan shilling is performing poorly.  Chief among them is the country's love affair with imported goods and services. It is estimated that the value of Kenyan imports is Ksh. 380 billion while exports is Ksh. 38 billion. This trade imbalance has come home to haunt the country's currency. Thus, to stabilize the value of the shilling, new policies should focus on increasing food production and decreasing over-dependance on fuel-generated energy.

The economic problems of other regions of the world seem to have a ripple effect to the Kenyan economy. For example, the Euro Zone debt crisis that has affected various countries such as Greece, Portugal, and Spain, is threatening to ignite another cycle of global economic meltdown. When there is an economic crisis in the world, investors and traders often tend to sell their securities (shares or bonds) to purchase the United States dollar, which is generally regarded as a safe haven currency.

A conspiracy theory suggests that the free fall of the local currency is attributed to the relative peace in South Sudan and Somalia, as Kenya no longer enjoys the huge dollar transits to these countries. Nonetheless, the sum of the matter is that our country is sinking into deep economic woes, if nothing is done to calm the situation.

As pointed out earlier, the main cause of the depreciating value of the shilling is the increasing demand for U.S. dollars to pay for the Kenya's massive imports. About forty percent of the country's imports are dominated by the dollar. This is what has caused the increased demand for the safe haven currency in trade.

Kenya's current population size of about forty million is also increasing the demand for manufactured consumer goods, and since the country is unable to produce enough quantities of these goods, it has resorted to imports to suffice the need. The majority of the country's imports are electronics, foodstuffs, clothing, transport equipment, motor vehicles and their spare parts, iron, steel, and others. Consequently, if the value of the shilling is not managed in time, the prices of such imports will undoubtedly continue to escalate. Will the shilling sink deeper? Let us wait and see..........